Shattering the Debt Ceiling

It’s always exciting when money and politics mix. For example, on Friday billionaire investor Warren Buffett told students at Georgetown University it would be “pretty damn dumb” if Congress and President Obama don’t reach an agreement to raise the nation’s debt ceiling. Here at the Economic Prism we delight in the words “damn” and “dumb,” especially when used to describe the country’s leaders.

But unlike Buffett we consider not raising the debt ceiling to be pretty damn smart. Moreover, we’re in favor of Washington gridlock stopping the Treasury from borrowing from tomorrow to pay for things bought yesterday. We’re also supportive of any opportunity to dismantle parts – or all – of the colossal Obamacare edifice.

Similarly, we hope financial markets lose their nerve over the game of debt ceiling chicken being waged between the House and the President. An S&P 500 at 1,700 seems irrationally high. Nonetheless, we don’t recommend shorting it. Because as John Maynard Keynes once noted, “Markets can remain irrational longer than you can remain solvent.”

However, with any luck the debt ceiling debate will take some of the speculative gas out of the stock market. In fact, now is a good time to narrow down the list of stocks you’d like to own…and at what price. Equally important, now is the time to prepare your nerves so you’re emotionally ready to buy when everyone else sells.

What follows is some perspective on the debt ceiling debate and prospects of a government shutdown…

In Favor of Government Shutdown

“How Congress and President Barack Obama deal with the debt ceiling is likely to determine market volatility for the rest of the year,” reports MarketWatch.

“Now that the expected tapering of $85 billion a month in asset purchases fizzled out at the Federal Reserve’s September policy meeting, investor attention has shifted to the brewing showdown over the budget and the debt ceiling.

“Already the House has thrown down a gauntlet to the Obama Administration, passing a budget bill that keeps the government running through mid-December but guts funding for Obama’s health-care law. Without a budget by October 1, when the government’s fiscal year 2014 begins, a shutdown becomes a real possibility.”

Does the prospect of a government shutdown alarm you? If so, we recommend taking several deep breaths before considering what this means.

Shattering the Debt Ceiling

A government shutdown would force the government to stop spending credit on things it can’t afford with money it doesn’t have. At least it should, in theory.

You see, the government shutdown should have already happened. Months ago. That’s when the Treasury maxed out its legally authorized debt allowance. Unfortunately, the Treasury’s been substituting honest accounting for fudge to balance its books. No kidding…

If you can believe it, Treasury Secretary Jack Lew’s locked the U.S. government’s debt at 16,699,396,000,000 since May 17 – over four months. That’s just a smidge below the nation’s current borrowing limit. As of last Friday, the reported debt was still locked.

What’s more, the Treasury’s continued to run monthly deficits without adding to the debt. In July, it ran a deficit of $98 billion. In August, it ran a deficit of $148 billion.

Where is the monthly deficit going to? Should it not be showing up in the overall debt tally?

Regardless of what the Treasury’s published literature reads, the debt ceiling was shattered sometime in mid-May…if not earlier. Keep this in mind as the charade out of Washington plays out over the coming weeks. What you will be witnessing is the rumble and bumble of balder and dash.